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CHAPTER-IV
INTEREST RATE RISK MANAGEMENT IN KRISHNA GRAMEENA BANK
4.1 Introduction
Interest Rate Risk denotes the changes in interest income and
consequent possibility of loss due to changes in the rate of interest. “The
management of interest risk is fundamental to sound practice. If poorly
managed, a bank can experience earnings, liquidity and ultimately capital
adequacy problems. Traditionally, bankers and bank regulators have
focused on the impact on earnings from changes in interest rates. A change
in interest rates affects not only earnings but also the market values of all
fixed rate instruments. Whether these changes manifest themselves
immediately in earnings depends on accounting rules. It merely because,
such changes may be buried in historic cost accounting does not mean that
they do not matter”1.
“Deregulation of interest rates has exposed the banks to the adverse
impact of interest rate risk. Interest rate risk is the risk where unexpected
change in the market interest may impact on the Net Interest Income (NII)
and Net Interest Margin (NIM). Any mismatches in the cash flows (fixed
assets or liabilities) or re-pricing dates (floating assets or liabilities), expose
bank’s Net Interest Income or Net Interest Margin to variations. The
earnings of assets and cost of liabilities are closely related to market interest
rate volatility. Interest rate risk may take the form of gap or mismatch risk,
basis risk, embedded option risk, yield risk, price risk”2.
The interest rate risk can thus be viewed from two different but
complimentary perspectives. One perspective is the traditional accounting
perspective which focuses on the sensitivity of earnings to rate movements.
The other is the economic perspective which focuses on the sensitivity of
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the market values of all financial instruments, whether they are assets,
liabilities or off-balance sheet contracts. The economic perspective focuses
on the market values of the bank’s capital accounts which is often referred
to as the market value of portfolio equity. The sensitivity of the market
value of portfolio equity to changes in interest rate is a good,
complimentary indicator of the level of interest rate risk inherent in an
institution’s current position and a leading indicator of future earnings
trends.
4.2 Sources of interest Rate Risk3
The following are the various sources and dimensions of interest rate
risk in bank.
1. Repricing Risk
As financial intermediaries banks encounter interest rate risk in
several ways. The primary and most often discussed form of Interest Rate
Risks arise from timing differences in maturity (for fixed rate) and re-
pricing (for floating rate) of bank assets, liabilities and off-balance sheet
positions. While such re-pricing mismatches are fundamental to the
business of banking. They can expose a bank’s income and underlying
economic value to unanticipated fluctuation as interest rates vary.
2. Yield Curve Risk
Re-pricing mismatches can also expose a bank to changes in the
slope and shape on the yield curve. As the economy moves through
business cycles the Yield Curve changes rather more frequently. The Yield
Curve Risk arises when unanticipated shifts of the Yield Curve have
adverse effects on a bank’s income or underlying economic value. For
instance, the underlying economic value of a long position in ten year
government bonds hedged by a short position in five year government
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bonds could decline sharply if the Yield Curve steepens, even if the position
is hedged against parallel movements in the Yield Curve.
3. Rate Level Risk
This refers to the possibility of changes in the level of interest rate.
The general change in the level of interest rates is a key factor in the choice
of fixed/floating mix, maturity and hedging decisions. During a given
period the interest rate levels are to be restructured either due to the market
conditions or due to regulatory intervention. In the long run, rate level risks
affect decisions regarding the type and the mix of assets/ liabilities to be
maintained and their maturing period. The Reserve Bank of India has been
lowering the statutory Cash Reserve Ratio (CRR) for banks in a phased
manner from 12 per cent since the year 1996 onwards. The decrease in CRR
increases the liquidity of banks which further results in lowering the
PLR/interest rates. For all new deposits the revised interest rates will be
applicable which will result in low marginal cost of funds.
4. Basis Risk
Another important source of interest rate risk commonly referred to
as basis risk which arises from imperfect correlation in the adjustment of
the rates earned and paid on different instruments with otherwise similar
repricing characteristics. Even when assets and liabilities are properly
matched in terms of repricing risk the banks are often exposed to Basis
Risk. When interest rates change these differences can give rise to
unexpected changes in the cash flows and earning Spreads between assets,
liabilities and off-balance sheet instruments of similar maturities or
repricing frequencies.
5. Embedded Option Risk
An additional and increasingly important source of Interest Rate Risk
arises from the options embedded in many bank assets, liabilities and off-
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balance sheet (OBS) portfolios. Big changes in the level of interest
encourage premature withdrawal of deposits on the liability side or
prepayment of loans on the asset side and it creates a mismatch and gives
rise to repricing risk. When funds are raised by the issue of bonds/securities
it may include call/put options and these two options are exposed to a risk
when the interest rates fluctuate. Bonds with put and call option may be
redeemed before their original maturity as the holder will like to exercise
put option in an increasing interest rate scenario while the issuer will
exercise call option if interest rates have fallen.
6. Volatility Risk
In deciding on the mix of the assets and liabilities the short-term
fluctuations in the pricing policies are to be considered in addition to the
long run implication of the interest rate changes. In a highly volatile market,
the risk will acquire serious proportions as the impact will be felt on the
cash flows and profits. The volatility witnessed in the Indian call money
market in 1994 explains the presence and the impact of the volatility Risk.
While some banks defaulted in maintenance of CRR, many banks borrowed
funds at high rates which had substantially reduced their profits.
4.3 Effects of Interest Rate Risk
Changes in interest rates can have adverse effects both on a bank’s
earnings and its economic values. Such effects of interest rate risk in bank
are shown below.
4.3.1 Earnings Perspective
This is the traditional approach to Interest Rate Risk assessment
taken by many banks. In the earning perspective the focus of analysis is the
impact of changes in interest rates on accrual or reported earning. As
reduced earning or outright losses can threaten the financial stability of an
institution by undermining its capital adequacy and by reducing market
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confidence. Such earnings perspective focuses attention on net interest
income (i.e., the difference between total interest income and total interest
expense). However, as banks have expended increasingly into activities that
generate fee-based and other non-interest income a broader focus on overall
net income incorporating both interest and non-interest income and
expenses has become more common. The non-interest income arising from
many activities such as, loan servicing and various asset securitizations
programmes can be highly sensitive to market interest rates.
4.3.2 Economic Value Perspectives
Variation in market interest rates can also affect the economic value
of a bank’s assets, liabilities and Off Balance Sheet positions. It will
ultimately impact the Market Value of Equity or the value of Net Worth of
the bank. Thus the sensitivity of a bank’s economic value to fluctuations in
interest rates is particularly important consideration of shareholders,
management and supervisors. The economic value of an instrument
represents an assessment of the present value of its expected net cash flows
discounted to reflect market rates. Since the Economic Value Perspective
considers the potential impact of interest rate changes on the present value
of all future cash flows, it provides a more comprehensive view of the
potential long term effects of changes in interest rates than is offered by the
Earning Perspective.
The Earnings and Economic Value Perspectives focus on how future
changes in interest rates may affect a bank’s financial performance. The
past interest rates may also have an impact on the future performance as
instruments that are not marked to market may already contain embedded
gains or losses due to past rate movements which may be reflected over
time in the bank’s earnings.
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4.4 Interest Rate Risk Measurement in Bank
Banks should have Interest Rate Risk Measurement system that
capture all material sources of Interest Rate Risk and that assess the effect
of interest rate changes in ways that are consistent with the scope of their
activities. The assumptions underlying the system should be clearly
understood by risk managers and bank management. Mere identification of
the presence of the Interest Rate Risk will not suffice. A system that
quantifies the risk and manages the same should be put in place so that
timely action can be taken. Any delay or lag in the follow-up action may
lead to a change in the dimension of the risk i.e. lead to some other risks
like Credit Risk, Liquidity Risk etc. and make the situation uncontrollable.
Risk Measurement System should assess all material Interest Rate Risk
associated with a bank’s assets, liabilities and OBS positions utilize
generally accepted financial concepts and risk measurement techniques and
have well document assumptions and parameters.
4.5 Techniques of Measuring Interest Rate Risk in Bank
Following are the various techniques or methods of measuring
interest rate risk in banks commonly used.
4.5.1 Maturity Gap Method
The simplest techniques for measuring a bank’s Interest Rate Risk
exposure begin with a maturity / repricing schedule that distributes interest-
sensitive assets, liabilities and OBS positions into ‘time bands’ according to
their maturity (if fixed rate) or time remaining to their next repricing (if
floating rate). This technique which is referred to as Gap is the difference
between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL)
that mature or repriced during a particular period of time. The objective of
this method is to stabilize / improve the Net Interest Income in the short run
over discreet periods of time called the Gap periods.
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The first step in Gap Analysis is to bifurcate the entire asset and
liability portfolio into two distinct categories viz., rate sensitive assets and
rate sensitive liabilities.
All the RSAs and RSLs are grouped into maturity buckets based on
the maturity and the time until the first possible repricing due to change in
the difference between the Interest Rate Sensitive Assets (RSAs) and the
Interest Rate Sensitive Liabilities (RSL).
RSG = RSAs – RSLs
RSG = Rate Sensitive Gap based on maturity
RSAsGap Ratio =
RSLs The bank can use the Gap to maintain / improve its Net Interest
Income for changing interest rates, otherwise adopt a speculative strategy
wherein by altering the Gap effectively depending on the interest rate
forecast the Net Interest Income can be improved. During a selected Gap
period the RSG will be positive when the RSAs are more than the RSLs,
negative when the RSLs are in excess of the RSAs and zero when the RSAs
and RSLs are equal. In order to tackle the rising/falling interest rate
structures the Maturity Gap Method suggests various positions that the
treasurer can take i.e.
i. Maintain a positive Gap when the interest rates are rising.
ii. Maintain a negative Gap when the interest rates are on a decline.
iii. Maintain a zero Gap position for firms to ensure a complete
hedge against any movements in the future interest rates.
The objective of an Asset Liability Management policy will be to
maintain the Net Interest Margin within certain limits by managing the risks
and the bank should first decide the maximum and minimum levels for the
NIM. The success or failure of the Maturity Gap Method depends to a large
105
extent on the accuracy level of the forecasts made regarding the quantum
and the direction of the interest rate changes. The assumption in the Gap
method that the change in the interest rates is immediately affecting all the
RSAs and RSLs by the same quantum is not always true in reality. Another
limitation of the Gap method is that the treasurer may not have the
flexibility in managing the Gap so as to effectively produce the targeted
impact on the net interest income. Simultaneously this model ignores the
time value of money for the cash flows occurring during the Gap period
which is an important factor to be considered.
4.5.2 Rate Adjusted Gap
The Maturity Gap Approach assumes a uniform change in the
interest rates for all assets and liabilities but this may not be the case in
reality. The market perception towards a change in the interest rate may be
different from the actual rise/fall in interest rates. Similarly irrespective of
any amount of fluctuation in the interest rate of the bank the differential
interest rate remains constant because of certain regulations. In the Rate
Adjusted Gap techniques, all the rate sensitive assets and liabilities will be
adjusted by assigning weights based on the estimated change in the rate for
the different assets/liabilities for a given change in interest rates.
4.5.3 Duration Analysis
Duration Analysis concentrates on the price risk and the
reinvestment risk while managing the interest rate exposure. It studies the
effect of rate fluctuation on the market value of the assets and liabilities and
Net Interest Margin (NIM) with the help of duration. Frederick Macaulay
observes that it is possible to blend information contained in the size and
timing of all cash flows into one number called duration. Duration is the
weighted average of time taken (in years) to receive all cash flows, the
weights being the present values of the cash flows. The Rate Sensitive Gap
calculated in Duration Analysis is based on the duration and not the
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maturity of the assets and liabilities. Duration Gap recognizes that Interest
Rate Risk arises when the timings of cash inflows and outflows differ even
if the assets and liabilities are categorized as rate insensitive as per the
conventional Gap technique. The Duration Gap (DGAP) is computed as the
difference between the composite duration of bank assets and marked down
composite duration of it liabilities.
DGAP = DA – K DL
Where in, DGAP = Duration Gap DA= Duration of Bank Assets KDL=composite Duration Liabilities Here DA is the summation of each asset’s duration weighted by its
share in total assets whereas DGAP is the duration of bank equity. The
impact on market value of equity due to interest rate movements can be
summarized as:
“A bank can immunize the market value of its equity by setting
DGAP = 0. In reality if a bank wants to perfectly hedge its equity value it
has to set its asset duration slightly less than its liability duration to
maintain positive equity.
No. Nature of
DGAP Change in Interest
Rate Change in Market Value of
Equity
1 DA = K DL Increase No Change
2 DA = K DL Decrease No Change
3 DA > K DL Increase Market Value Increases
4 DA > K DL Decrease Market Value Decreases
5 DA < K DL Increase Market Value Decreases
6 DA < K DL Decrease Market Value Increases
The DGAP measure is more scientific and realistic but more
sophisticated and complex in approach at the same time. A basic
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precondition for the use of this tool as a hedge mechanism is that all the
assets and liabilities of banks have to be positioned as marked to the market.
But for many banks in India very low portions of their balance sheets are
marked to the market. Therefore, the DGAP tool has less applicability in the
Interest Rate Risk immunization of a bank’s balance sheet”.4
4.5.4 Simulation Techniques
Simulation techniques involve detailed assessment of the potential
effects of changes in interest rates on earnings and economic value by
simulating the future path of interest rates and their impact on cash flows. In
static simulations, the cash flows arising solely from the bank’s current on
and off balance sheet positions are assessed and in a dynamic simulation
approach, the simulation builds in more detailed assumptions about the
future course of interest rates and expected changes in the bank’s business
activity over that time many banks (especially those using complex
financial instruments or otherwise having complex risk profiles) employ
more sophisticated Interest Rate Risk measurement system than those based
on simple maturity repricing schedules.
4.5.5 Value-at-Risk Approach
Value-at-Risk methodology is a risk control method which
statistically predicts the maximum potential loss a bank’s portfolio could
experience over a specific holding period at a certain probability. Using this
method it is possible to measure the amount of risk for each produce with a
common yardstick. The Value-at-Risk methodology takes into
consideration the sensitivity of the current position’s marginal move in the
risk factors like interest rates, foreign exchange rates etc., the standard
deviation of the historical volatility of the risk factors and the correlation
between the risk factors. The VaR is used to estimate the volatility of Net
Interest Income (NII) and net portfolio with a desired level of confidence.
The Value-at-Risk concept has been recommended by the Basle Committee
108
as a standard measure of risk. The Basle Committee on banking supervision
has recommended that Value-at-Risk may be calculated as on 99 per cent
confidence interval basis.
The variety of the techniques range from calculation that rely simply
on maturity and re-pricing charts, duration Gap analysis, static simulations
based on current on balance sheet and off balance sheet positions, highly
sophisticated dynamic modeling techniques that incorporate assumptions
about the behaviour of the bank and its customers in response to changes in
the interest rate environment. All those methods vary in their ability to
capture the different forms of interest rate exposure. It is needless to
mention that the usefulness of each technique depends on the validity of the
underlying assumption and the accuracy of the basic methodologies used to
model Interest Rate Risk exposure.
4.6 RBI Guidelines with regards to Interest Rate Risk Management
in bank
The RBI issued guidelines in the year 1999 to tackle the problem of
short-term liquidity. As per the Prudential Norms set by the RBI every bank
has to ensure that the net outgo of funds during the coming 28 days should
not exceed 20 per cent of the total outflow of cash. The Reserve Bank has
also adopted Maturity Ladder for a comparative study of future cash
inflows and cash outflows and all banks have been directed to prepare
Liquidity Statements on the pattern of Maturity Ladder at quarterly intervals
starting from the June 1999. In constructing the Maturity Ladder, a bank has
to allocate each cash inflow or outflow to a given calendar date from a
starting point. A maturing asset will result in cash inflow while a maturing
liability will amounts to cash outflow.
For constructing the Maturity Ladder classification of available data
is necessary. For example a five-year deposit with only three months left to
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maturity will be classified as cash outflow likely to take place in three
months time. Thus maturity profile could be used for measuring the future
cash flows of banks in different time buckets.
“The time buckets, given the Statutory Reserve Cycle of the days, have
been distributed as follows.
(i) 1 to 14 days
(ii) 15 to 28 days
(iii) 29 days and above up to 3 months
(iv) Over 3 months and up to 6 months
(v) Over 6 months and up to 1 year
(vi) Over 1 year and up to 3 years
(vii) Over 3 years and up to 5 years
(viii) Over 5 years”.5
Within each time bucket there could be mismatches depending on
cash inflows and outflows. While the mismatches up to one year would be
relevant since these provide early warning signals of impending liquidity
problems. The main focus should be on the short term mismatches viz. 1-14
days and 15-28 days. Banks are expected to monitor their cumulative
mismatches across all time buckets by establishing internal prudential limits
with the approval of the Board/Management Committee. The mismatches
(negative Gap) during 1-14 days and 15-28 days in normal course may not
exceed 20 per cent of the cash outflows in each time bucket. If a bank in
view of its current asset-liability profile and the consequential structural
mismatches needs higher tolerance level it could operate with higher limit
sanctioned by its Board/Management Committee giving specific reasons on
the need for such higher limit. The discretion to allow a higher level was
intended for a temporary period i.e. till 31 March, 2000. Indian banks with
large branch network can afford to have larger tolerance levels in
mismatches in the long term if their term deposit base is quite high. While
110
determining the tolerance level the banks may take into account all relevant
factors based on their asset-liability base, nature of business, future strategy
etc.
In case the negative Gap exceeds the prudential limit of 20 per cent
outflows (1-14 days and 15-28 days), the bank may show by way of
footnote as to how it proposes to finance the Gap to bring the mismatch
within the prescribed limits. The Gap can be financed from market
borrowings, bills Rediscounting, repay and deployment of foreign currency
resources after conversion into rupees etc.
In the context of poor MIS, slow pace of computerization in banks
and the absence of total deregulation, the Reserve Bank has decided to
implement the simplest method of traditional Gap Analysis as a suitable
method to measure the Interest Rate Risk. It is the intention of RBI to move
over to the modern techniques of Interest Rate Risk measurement like
Duration Gap Analysis, Simulation and Value at Risk over time when banks
acquire sufficient expertise and sophistication in acquiring and handling
MIS.
“The Gap or mismatch risk can be measured by calculating Gaps
over different time intervals. Gap Analysis measures mismatches between
rate sensitive liabilities and rate sensitive assets. An asset or liability is
normally classified as rate sensitive if,
(i) Within the time interval under consideration there is cash flow.
(ii) The interest rate resets/reprices contractually during the interval.
(iii) RBI changes the interest rates (interest rates on Savings Bank
Deposits, DRI Advances, Export Credit, Refinance, and CRR
balance etc.) in cases where interest rates are administered.
(iv) It is contractually pre-payable or withdrawable before the stated
maturities”6.
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The Gap Report should be generated by grouping rate sensitive
liabilities, assets and off-balance sheet positions into time buckets according
to residual maturity or next repricing period whichever is earlier. For
determining rate sensitivity, all investments, advances, deposits,
borrowings, purchased funds etc. that mature / reprice within a specified
time frame are deemed interest rate sensitive. Any principle repayment of
loan including final principle payment and interim instalments are also rate
sensitive if the bank expects to receive it within the time horizon. Generally,
certain assets and liabilities that receive / pay rates with a reference rate are
repriced at pre-determined intervals and are rate sensitive at the time of
repricing. While the interest rates on term deposits are fixed during their
currency, the advances portfolio of the banking system is basically floating
and the interest rates on advances could be repriced any number of
occasions corresponding to the changes in PLR.
Each bank should set prudential limits on individual Gaps with the
approval of the Board/Management Committee. The prudential limits
should have a bearing on the total assets, earning assets or equity. The
banks may workout earnings at risk (EaR) or Net Interest Margin (NIM)
based on their views on interest rate movements and fixes a prudential level
with the approval of the Board/Management Committee.
4.7 Maturity Gap analysis Technique in Krishna Grameena Bank
There are various techniques of assessing interest rate risk
management in bank like Maturity Gap analysis technique, Rate adjusted
Gap, Duration Analysis, Simulation Technique, Value at Risk (VaR) and
Derivatives etc. The Maturity Gap analysis technique of asset liability
management is used to assess Interest Rate Risk in Krishna Grameena Bank
for the period of seven accounting years from 2005-06 to 2011-12 and also
efforts are made to study the effect of changes in interest rates on Net
112
Interest Income (NII) and on Net Interest Margin (NIM) and on Net Income
of Bank.
Gap analysis is a technique of asset-liability management that can be
used to assess interest rate risk or liquidity risk. It measures at a given date
the gaps between rate sensitive liabilities (RSL) and rate sensitive assets
(RSA) (including off-balance sheet positions) by grouping them into time
buckets according to residual maturity or next repricing period, whichever
is earlier. An asset or liability is treated as rate sensitive if
i) Within the time bucket under considerations, there is a cash flow;
ii) The interest rate resets/ re-prices contractually during the time
buckets;
iii) Administered rates are changed and
iv) It is contractually pre-payable or withdrawal allowed before
contracted maturities.
This gap is used as a measure of interest rate sensitivity. A bank
benefits from a positive gap i.e., RSA>RSL, if interest rate rises. Similarly,
a negative gap (RSA<RSL) is advantageous during the period of falling
interest rate. The interest rate risk is minimized if the gap is near zero.
4.8 Determination of Rate Sensitive Assets and Rate Sensitive
Liabilities
Rate sensitive assets and liabilities are arrived by grouping only
those assets and liabilities which come within the time bucket 1-14 days to
6 months-1 year. There should be constant resets and reprices of interest
rates during the time buckets. There should be contractual prepayment and
withdrawal. The total of assets and liabilities which satisfy the above
conditions are taken as rate sensitive assets and rate sensitive liabilities.
Thus the gap is given by
113
Gap = Rate Sensitive Assets- Rate Sensitive Liabilities
Rate Sensitive Asset Gap Ratio =
Rate Sensitive Liabilities
After the computation of rate sensitive assets and rate sensitive
liabilities uniform rate of interest has been assigned for rate sensitive assets
and fixed rate assets. This has been followed for rate sensitive liabilities and
fixed rate liabilities.
The interest rate for assets is to be calculated by using the following
formula,
Interest earned Interest rate for assets
= Total advances + Total investments + Total Foreign currency assets – Non-earning assets
x 100
The interest rate for assets has been arrived at by taking into account
total advances, total investments, total foreign currency assets and non
earning assets.
The interest rate for liabilities is to be calculated by using the
following formula:
Interest expended Interest rate for liabilities
= Total deposits + Total borrowings + Total foreign currency liabilities
x 100
The interest rate for liabilities has been arrived at by taking into
account the interest expended, total deposits, total borrowings and total
foreign currency liabilities.
4.9 Computation of mix
The portfolio mix for assets and liabilities have been computed. The
mix for rate sensitive assets, fixed rate assets, non earning assets, rate
114
sensitive liabilities, fixed rate liabilities and non interest bearing liabilities
have been calculated to suggest the appropriate mix for assets and
liabilities.
Volume of rate sensitive assets Mix of rate sensitive assets =
Total/ Average of assets x 100
Volume of fixed rate assetsMix of fixed rate assets =
Total/ Average of assets x 100
Volume of non-earning assets Mix of non-earning assets =
Total/ Average of assets x 100
Volume of rate sensitive liabilities Mix rate of sensitive liabilities =
Total/ Average of liabilities x 100
Volume of fixed rate liabilities Mix of fixed rate liabilities =
Total/ Average of liabilities x 100
Volume of non-interest bearing liabilities Mix of non-interest bearing
liabilities =
Total/ Average of assets
x100
4.10 Computation of performance measures
The Net Interest Income (NII), Net Interest Margin (NIM), Net
Income (NI) and gap are the measures used to gauge the performance of
Bank with relation to the asset liability management.
4.10.1 Net Interest Income
Net Interest Income = (Interest rate of RSA x Volume of RSA) +
(Interest rate of FRA x Volume of FRA) – (Interest rate of RSL x Volume
of RSL) – (Interest rate of FRL x Volume of FRL).
115
4.10.2 Net Interest Margin
“This ratio identifies core earning capacity of the bank and its
interest differential income as a percentage of average total assets. An
alternative calculation prescribes earning assets as the denominator based
on the presumption that the interest margin applies to earning assets
engaged in providing interest income. However, both non-earning assets
and non-interest bearing liabilities have a powerful impact on the net
interest margin. This is because non earning assets are a drag on income,
particularly if they are financed with interest bearing liabilities, while non
interest bearing deposits boost earnings, particularly if they are financing
high interest bearing assets. The Standard ratio prescribed by the World
Bank is 4.5%”.7
It can be calculated by using the following formula.
Net interest income Net Interest Margin =
Total performing assetsx 100
4.10.3 Net Income
Net Income is the difference between the net interest income and
provisions and contingencies. It can be calculated by using the following
formula.
Net Income = Net interest income – Provisions and contingencies
The various formulas suggested above are used for drawing
conclusions about the interest rate risk management in Krishna Grameena
Bank. The results are calculated for KGB by using all the three parameters
for seven years from 2005-06 to 2011-12.
116
4.11 Calculation of Rate Sensitive Asset and Rate Sensitive Liability,
Gap, Net Interest Income, Net Interest Margin and Net Income
in Krishna Grameena Bank
Table-4.1: Residual Maturity pattern of assets and
liabilities for the year 2005-06
Rs. in Lakhs
Maturity patterns
Deposits Advances Investments BorrowingsForeign
currency assets
Foreign currency liability
1 to 180 days
19932.15 19135.92 -- 454.59 -- --
181 to 365 days
5537.58 10525.24 250.00 10656.78 -- --
1 to 3 years
12575.36 10976.35 436.35 1019.76 -- --
3 to 5 years
4625.92 7564.46 9617.67 788.85 -- --
Over 5 years
3612.54 5515.36 1457.49 6233.78 -- --
Source: Annual Report of KGB for the year 2005-06.
Table-4.2: Break up of assets and liabilities based on
Maturity Pattern for the year 2005-06
Items Volume (Rs. In lakhs)
Interest Rate Mix (%)
RSA 29911.16 9.67 38.93
FRA 35567.68 9.67 46.30
NEA 11340.25 -- 14.77
Total/ average 76819.09 6.44 100.00
RSL 36581.10 4.13 47.61
FRL 28856.21 4.13 37.56
NIBL 11381.78 -- 14.83
Total/ Average 76819.09 2.75 100.00
Figures computed from Annual Report of KGB for the year 2005-06
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The above table 4.2 shows the break up of assets and liabilities in the
year 2005-06. The table suggests that the RSA and RSL, which are Rate
Sensitive Assets and Rate Sensitive Liabilities of balance sheet positions
have been classified according to the residual maturity. Here the entire
volume of Rate Sensitive Assets, Rate Sensitive Liabilities, Fixed Rate
Assets, Fixed Rate Liabilities, non-earning assets and non-interest bearing
liabilities has been calculated and the total amount comes around
Rs.76819.09 lakhs.
The interest rates for RSA, FRA, RSL and FRL shows that the total
average of interest rate for assets comes around 6.44 and the average of
interest rate for liabilities comes around 2.75. The mix for RSA, FRA,
NEA, RSL, FRL and NIBL has been computed. The mix for assets i.e.,
RSA comes around 38.93, for FRA it is 46.30, for NEA it is 14.77. The
mix for liabilities i.e., RSL comes around 47.61, for FRL it is 37.56 and for
NIBL it is 14.83 %. It has been confirmed from the table 4.3 which shows
that there is a negative gap i.e., RSA < RSL. This trend is advantageous
during the period of falling interest rates. The interest rate risk is
minimized if the gap is nearing to zero.
Table-4.3: Summary of Performance Measures for the year 2005-06
Rs. in Lakhs
Change in interest rate
Performance Measure Initial
Position 2% decrease
in interest rate
2% increase in interest
rate
GAP (RSA-RSL) -6669.94 -6669.94 -6669.94
Net interest income 3629.24 3762.64 3495.84
Net interest margin (%) 5.79 6.00 5.57
Net income 3078.55 3211.95 2945.154
Figures computed from Annual Report of KGB for the year 2005-06.
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The above table shows summary of performance measures can be
arrived at by the calculation of net interest income, net interest margin
(NIM) and net income (NI). It can be inferred that during the year 2005-06
the gap is negative and it comes around Rs. 6669.94 lakhs. The interest
income is Rs 3629.24 Lakhs. The net interest margin is 5.79 % which is
more than the standard norm prescribed by the World Bank and the net
income comes around Rs 3078.55 lakhs. The above data is shown with the
help of figure 4.1.
Figure-4.1: Summary of Performance Measures for the year 2005-06
0
500
1000
1500
2000
2500
3000
3500
4000
Rs.
in L
akh
s
Net interest income Net income
Performance Measure
Initial Position 2% decrease in interest rate 2% increase in interest rate
When interest rate negative shock of 2% was applied, it increased the
NII to Rs.3762.64 lakhs, NIM to 6%, and NI to Rs.3211.95 lakhs.
However, when interest rate positive shock of 2% was applied, it reduced
the NII to Rs.3495.84 lakhs, NIM to 5.57% and NI to Rs.2945.154 lakhs. It
is concluded that decrease of 2% in interest rate has increased the net
interest margin by 0.21% over the initial position. It is because of the
negative Gap.
119
Table-4.4: Period-wise Residual Maturity of assets and
liabilities for the year 2005-06
Rs. in Lakhs
Items 1 to 180
days 181 to 365
days
Advances 19135.92 10525.24
Investments -- 250.00
Foreign currency assets -- --
Deposits 19932.15 5537.58
Borrowings 454.09 10656.78
Foreign currency liabilities -- --
GAP -1250.32 -5419.12 Source: Annual Report of KGB for the year 2005-06.
It is evident from the above table that the residual maturity of the rate
sensitive assets and rate sensitive liabilities from 1 day to 180 days and 181
days to 365 days for the year 2005-06. It is revealed that the time buckets
of 1-180 days, 181-365 days are vulnerable paving way to negative gaps of
high volume.
Table-4.5: Residual Maturity pattern of assets and
liabilities for the year 2006-07
Rs. in Lakhs
Maturity patterns
Deposits Advances Investments BorrowingsForeign
currency assets
Foreign currency liability
1 to 180 days
9523.00 34572.00 920.00 520.00 -- --
181 to 365 days
930.00 13605.00 -- 20352.00 -- --
1 to 3 years
35004.00 8305.00 8312.00 3580.00 -- --
3 to 5 years
2555.00 6999.00 3946.00 1036.00 -- --
Over 5 years
10474.00 3725.00 480.00 2404.00 -- --
Source: Annual Report of KGB for the year 2006-07
120
Table-4.6: Break up of assets and liabilities based on
residual maturity pattern for the year 2006-07
Items Volume (Rs. In lakhs)
Interest Rate Mix (%)
RSA 49097.00 9.81 48.91
FRA 31767.00 9.81 31.64
NEA 19516.77 -- 19.45
Total/ average 100380.77 6.54 100.00
RSL 31325.00 3.95 31.20
FRL 55053.00 3.95 54.84
NIBL 14002.77 -- 13.96
Total/ Average 100380.77 2.63 100.00
Source: Figures computed from Annual Report of KGB 2006-07
The above table shows the break-up of assets and liabilities in the
year 2006-07. It suggests that the RSA and RSL have been classified
according to the residual maturity. Here, the entire volume of rate sensitive
assets, rate sensitive liabilities, fixed rate assets, fixed rate liabilities have
been calculated and the total comes around Rs.100380.77 lakhs.
The interest rates for RSA, FRA, RSL and FRL have also been
computed. The total average of interest rates for assets comes around 6.54
and the average of interest rate for liabilities comes around 2.63.
The portfolio mix computation suggests that the asset mix i.e., RSA
comes around 49 and for FRA it is around 32, for NEA around 19.
Similarly, the liability mix i.e., RSL, comes around 31, for FRL around 55
and for NIBL comes around 14.
The table 4.7 shows that there is a positive gap i.e., RSA > RSL.
This trend is advantageous during the period of increasing interest rates.
121
Table-4.7: Summary of Performance Measures for the year 2006-07
Rs. in Lakhs
Change in interest rate
Performance Measure Initial
Position 2% decrease
in interest rate
2% increase in interest
rate
GAP (RSA-RSL) 17772 17772 17772
Net interest income 4520.82 4166.86 4877.74
Net interest margin (%) 5.81 5.36 6.27
Net income 3718.53 3364.57 4075.45
Figures computed from Annual Report of KGB for the year 2006-07.
The performance measures such as Net Interest Income (NII), Net
Interest Margin (NIM) and Net Income (NI) have been calculated. It can be
inferred that in the year 2006-07 the GAP i.e., RSA-RSL is positive and it
comes to Rs.17772 lakhs. The net interest income is Rs.4520.82. lakhs, the
net interest margin is 5.81 which is also more than the standard norm
prescribed by the World Bank and the net income comes to Rs.3718.53
lakhs.
The summary of performance measure for the year 2006-07 is also
shows with the help of figure 4.2.
When interest rate negative shock of 2% was applied, it reduced the
NII to Rs.4166.86 lakhs, NIM to 5.36% and NII to Rs.3364.57 lakhs,
whereas, when interest rate positive shock of 2% was applied, it increased
NII to Rs.4877.74, NIM to 6.27% and NI to Rs.4075.45 lakhs. When there
is a positive gap (i.e., RSA > RSL) this trend is more advantageous during
the period of increasing interest rates.
122
Figure-4.2: Summary of Performance Measures for the year 2006-07
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Rs.
in L
akhs
Net interest income Net income
Performance Measure
Initial Position 2% decrease in interest rate 2% increase in interest rate
Table-4.8: Period wise Residual Maturity of assets and
liabilities for the year 2006-07
Rs. in Lakhs
Items 1 to 180
days 181 to 365
days
Advances 34572 13605
Investments 920 --
Foreign currency assets -- --
Deposits 9523 930
Borrowings 520 20352
Foreign currency liabilities -- --
GAP 25449 -7677 Source: Annual Report of KGB for the year 2006-07.
The above table shows the residual maturity of the rate sensitive
assets and rate sensitive liabilities from 1 to 180 days and 181 to 365 days
for the year 2006-07. It revealed that the time buckets of 181 days to 365
days are vulnerable paving way to negative gaps of high volume. The
negative gaps are due to the mismatch in the maturity pattern of assets and
liabilities.
123
Table-4.9: Residual Maturity pattern of assets and
liabilities for the year 2007-08
Rs. in Lakhs
Maturity patterns
Deposits Advances Investments BorrowingsForeign
currency assets
Foreign currency liability
1 to 180 days
1227.00 41824.00 253.00 5810.00 -- --
181 to 365 days
119.00 16459.00 -- 6238.00 -- --
1 to 3 years
4511.00 10046.00 10634.00 6118.00 -- --
3 to 5 years
329.00 8467.00 5049.00 7555.00 -- --
Over 5 years
691.14 4506.00 1538.00 5596.00 -- --
Source: Annual Report of KGB for the year 2007-08
Table-4.10: Break up of assets and liabilities based on
residual maturity pattern for the year 2007-08
Items Volume (R. in lakhs)
Interest Rate Mix (%)
RSA 58536 9.67 46.96
FRA 40240 9.67 32.28
NEA 25869.76 -- 20.76
Total/ average 124645.76 6.44 100.00
RSL 13394 4.35 10.74
FRL 93223 4.35 74.79
NIBL 18028.76 -- 14.47
Total/ Average 124645.76 2.90 100.00
Source: Figures computed from Annual Report of KGB for the year 2007-08
The above table reveals the break-up of assets and liabilities in the
year 2007-08. It shows that the RSA and RSL which are rate sensitive
124
assets and rate sensitive liabilities of balance sheet positions have been
classified according to the residual maturity. Here the entire volume of rate
sensitive assets, rate sensitive liabilities, fixed rate assets, fixed rate
liabilities, non-earning assets and non-interest bearing liabilities have been
calculated and the total comes to Rs.124645.76 lakhs.
The interest rates for RSA, FRA, RSL and FRL have also been
calculated. The average of interest rate for assets comes to 6.44 and the
average of interest rate for liabilities comes is 2.90.
The portfolio mix computation suggests that the asset mix i.e., RSA
comes around 47 and for FRA it is little over 32 %, for NEA around 21%.
Similarly the liability mix i.e., RSL, comes around 11%, for FRL comes
around 75 %and for NIBL 15%.
The following table shows that there is a positive gap i.e., RSA >
RSL. This trend is advantageous during the period of increasing interest
rates.
Table-4.11: Summary of Performance Measures for 2007-08
Rs. in Lakhs
Change in interest rate
Performance Measure Initial
Position 2% decrease
in interest rate
2% increase in interest
rate
GAP (RSA-RSL) 45142 45142 45142
Net interest income 4913.79 4010.96 5816.64
Net interest margin (%) 5.08 4.15 6.02
Net income 4091.31 3188.48 4994.16
Figures computed from Annual Report of KGB for the year 2007-08
125
The performance measures such as net interest income (NII), net
interest margin (NIM) and net income (NI) have been calculated. From the
above table it can be inferred that in the year 2007-08, the GAP i.e., RSA-
RSL is positive and it comes to Rs.45142 lakhs. The net interest income is
Rs.4913.79 lakhs, the net interest margin is 5.08 %. It is more than the
standard ratio fixed by the World Bank. The net income comes to
Rs.4091.31 Lakhs. The above data is shown with the help of figure 4.3.
Figure-4.3: Summary of Performance Measures for the year 2007-08
0
1000
2000
3000
4000
5000
6000
Rs.
in L
akhs
Net interest income Net income
Performance Measure
Initial Position 2% decrease in interest rate 2% increase in interest rate
When interest rate negative shock of 2% was applied, it reduced, NII
to Rs.4010.96 lakhs, NIM to 4.15% and NI to Rs.3188.48 lakhs. However,
when interest rate positive shock of 2% was applied, it increased NII to
Rs.5816.64 lakhs, NIM to 6.02% and NI to Rs.4994.16 lakhs.
The above table clearly exhibits that the change in interest rate
affects on NII, NIM and NI. When the rate sensitive asset is more than the
rate sensitive liabilities this trend is more advantageous during the period of
increasing interest rates.
126
Table-4.12: Period wise Residual Maturity of assets and
liabilities for the year 2007-08
Rs. in Lakhs
Items 1 to 180
days 181 to 365
days
Advances 41824 16459
Investments 253 --
Foreign currency assets -- --
Deposits 1227 119
Borrowings 5810 6238
Foreign currency liabilities -- --
GAP 35040 10102 Source: Annual Report of KGB for the year 2007-08
The above table shows the residual maturity of the rate sensitive
assets and rate sensitive liabilities from 1 to 180 days and 181 to 365 days
for the year 2007-08 since there is a positive GAP of assets and liabilities
from 1 to 180 days and 181 to 365 days.
Table-4.13: Residual Maturity pattern of assets and
liabilities for the year 2008-09
Rs. in Lakhs
Maturity patterns Deposits Advances Investments Borrowings
Foreign currency
assets
Foreign currency liability
1 to 180 days
8044.00 49840.00 9565.00 4125.00 -- --
181 to 365 days
4146.00 17860.00 2461.00 3266.00 -- --
1 to 3 years
38681.00 9050.00 9050.00 3200.00 -- --
3 to 5 years
15091.00 7456.00 1999.00 450.00 -- --
Over 5 years
29792.00 11680.00 30233.00 -- -- --
Source: Annual Report of KGB for the year 2008-09
127
Table-4.14: Break up of assets and liabilities based on
residual maturity pattern for the year 2008-09
Items Volume (Rs. In lakhs)
Interest Rate Mix (%)
RSA 79726 9.43 51.62
FRA 39230 9.43 25.40
NEA 35483 -- 22.98
Total/ average 154439 6.28 100.00
RSL 19581 4.80 12.67
FRL 117447 4.80 76.04
NIBL 17411 -- 11.29
Total/ Average 154439 3.20 100.00 Source: Figures computed from Annual Report of KGB for the year 2008-09
The above table shows the break up of assets and liabilities in the
year 2008-09. The data reveals that the RSA and RSL which is rate
sensitive assets and rate sensitive liabilities of balance sheet positions have
been classified according to the residual maturity. Here the entire volume
of rate sensitive assets, rate sensitive liabilities, fixed rate assets, fixed rate
liabilities, non-earning assets and non-interest bearing liabilities have been
calculated and the total comes to Rs.154439 lakhs.
The interest rates for RSA, FRA, RSL and FRL have also been
computed. The average of interest rate for assets comes to 6.28 and the
average of interest rate for liabilities comes to 3.2.
The portfolio mix computation suggests that the asset mix i.e., RSA
comes around 52 and for FRA around 25, for NEA around 23. Similarly,
the liability mix i.e., RSL, comes around 13, for FRL 76 and for NIBL
comes around 11.
128
The following table shows that there is a positive gap i.e.,
RSA>RSL. This trend is advantageous during the period of increasing
interest rates.
Table-4.15: Summary of Performance Measures for 2008-09
Rs. in Lakhs
Change in interest rate
Performance Measure Initial
Position 2% decrease
in interest rate
2% increase in interest
rate
GAP (RSA-RSL) 60145 60145 60145
Net interest income 4640.20 3437.30 5843.10
Net interest margin (%) 3.98 2.95 5.01
Net income 4140.51 2937.61 5343.41
Figures computed from Annual Report of KGB for the year 2008-09.
The performance measures such as net interest income (NII), net
interest margin (NIM) and net income (NI) have been calculated. From the
above table it can be inferred that in the year 2008-09, the GAP i.e., RSA-
RSL is positive and it comes around Rs.60145 lakhs. The net interest
income is Rs.4640.20 lakhs, the net interest margin (NIM) is 3.98% which
is very low when compared to the standard ratio prescribed by World Bank
is 4.5% and the net income comes around Rs.4140.51 Lakhs.
When 2% decrease in interest rate was applied, it decreased NII to
Rs.3437.30, NIM to 2.95% and NI to Rs.2937.61 lakhs. On the other hand,
when 2% increase in interest rate was applied, it increased NII to
Rs.5843.10 lakhs, NIM to 5.015 and NI to Rs.5343.41 lakhs.
The above table reveals that the increase in interest rate is more
advantageous when there is a positive gap. The above data is shown with
the help of figure 4.4.
129
Figure-4.4: Summary of Performance Measures for the year 2008-09
0
1000
2000
3000
4000
5000
6000
Rs.
in
Lakh
s
Net interest income Net income
Performance Measure
Initial Position 2% decrease in interest rate 2% increase in interest rate
Table-4.16: Period wise Residual Maturity of assets and
liabilities for the year 2008-09
Rs. in Lakhs
Items 1 to 14 days
15 to 28 days
29 days to 3
months
3 to 6 months
6 months
to 1 year
Advances -- -- -- 49840.36 17860.78
Investments -- -- -- 9565.88 2461.00
Foreign currency assets
-- -- -- -- --
Deposits -- -- -- 8044.59 4146.17
Borrowings -- -- -- 4125.00 3266.99
Foreign currency liabilities
-- -- -- -- --
GAP -- -- -- 47236.65 12908.71
Source: Annual Report of KGB for the year 2008-09.
130
Table-4.17: Residual Maturity pattern of assets and
liabilities for the year 2009-2010
Rs. in Lakhs
Maturity patterns
Deposits Advances Investments BorrowingsForeign
currency assets
Foreign currency liability
1 to 14 days
5600 11200 -- -- -- --
15 to 29 days
5500 11000 -- -- -- --
29 days to 3 months
6800 24000 -- -- -- --
3 to 6 months
15400 20000 -- 1500 -- --
6 months to 1 year
21000 19800 -- 5115 -- --
1 to 3 years
24000 12500 9666 2400 -- --
3 to 5 years
12500 10000 16836 1000 -- --
Over 5 years
18722 5803 2352 30119 -- --
Source: Annual Report of KGB for the year 2009-10.
The above table shows the residual maturity of the rate sensitive
assets and rate sensitive liabilities from 90 days-180 days to 181 days – 365
days for the year 2008-09. The difference between rate sensitive assets and
rate sensitive liabilities of 3 months to 6 months and 6 months to 1 year
shows the positive Gap.
The above table shows the break up of assets and liabilities in the
year 2009-10. The table suggests that the RSA and RSL which are rate
sensitive assets and rate sensitive liabilities of balance sheet positions have
131
been classified according to the residual maturity. Here, the entire volume
of rate sensitive assets, rate sensitive liabilities, fixed rate assets, fixed rate
liabilities, non-earning assets and non-interest bearing liabilities have been
calculated and the total comes to Rs.169102 Lakhs.
Table-4.18: Break up of assets and liabilities based on
residual maturity pattern for the year 2009-10
Items Volume (Rs. In lakhs)
Interest Rate Mix (%)
RSA 86000 9.36 50.85
FRA 57157 9.36 33.80
NEA 25855 -- 15.35
Total/ average 169102 6.24 100.00
RSL 60915 4.94 36.02
FRL 88741 4.94 52.47
NIBL 19446 -- 11.51
Total/ Average 169102 3.29 100.00
Source: Figures computed from Annual Report of KGB for 2009-10.
The interest rates for RSA, FRA, RSL and FRL have also been
computed. The average of interest rate for assets comes around 6.24 and
the average of interest rate for liabilities comes around 3.29.
The portfolio mix computation suggests that the assets mix i.e., RSA
comes around 51 and for FRA it is around 34, for NEA around 15.
Similarly, the liability mix i.e., RSL, comes around 36, for FRL around 52
and for NIBL comes around 12.
The table 4.19 confirmed that there is a positive GAP i.e.,
RSA>RSL. This trend is advantageous during the period of increasing
interest rates.
132
Table-4.19: Summary of Performance Measures for the year 2009-10
Rs. in Lakhs
Change in interest rate
Performance Measure Initial
Position 2% decrease
in interest rate
2% increase in interest
rate
GAP (RSA-RSL) 25085 25085 25085
Net interest income 6006.48 5506.46 6509.86
Net interest margin (%) 4.24 3.88 4.59
Net income 4637.34 4137.32 5140.72 Figures computed from Annual Report of KGB for the year 2009-10. The performance measures such as net interest income (NII), net
interest margin (NIM) and net income (NI) has been calculated. From the
above table it can be inferred that in the year 2009-10, the Gap is positive
and it comes to Rs. 25085 Lakhs. The net interest income is Rs.6006.48
lakhs, the interest margin is 4.24% and the net income comes to Rs.4637.34
lakhs. The standard ratio of NIM for the bank is 4.50% prescribed by the
World Bank. The calculated figure of NIM of KGB is less than the standard
norm given by the World Bank. The above data is shown with the help of
figure 4.5.
Figure-4.5: Summary of Performance Measures for the year 2009-10
0
1000
2000
3000
4000
5000
6000
7000
Rs.
in
Lakh
s
Net interest income Net income
Performance Measure
Initial Position 2% decrease in interest rate 2% increase in interest rate
133
When 2% interest rate decreased, it reduced NII to Rs.5506.46 lakhs,
NIM to 3.88% and NI to Rs.4137.32 lakhs. However, when 2% increase in
the interest rate was applied it increased NII to Rs.6509.86 lakhs, NIM to
4.59% and NI to Rs.5140.72 lakhs. The above table suggests that in case of
positive Gap the bank is more advantageous during the period of increasing
interest rates.
Table-4.20: Period wise Residual Maturity of assets and
liabilities for the year 2009-10
Rs. in Lakhs
Items 1 to 14 days
15 to 28 days
29 days to 3
months
3 to 6 months
6 months
to 1 year
Advances 11200 11000 24000 20000 19800
Investments -- -- -- -- --
Foreign currency assets
-- -- -- -- --
Deposits 5500 5500 6800 15400 21000
Borrowings -- -- -- 1500 5115
Foreign currency liabilities
-- -- -- -- --
GAP 5700 5500 17200 3100 -6315
Source: Annual Report of KGB for the year 2009-10.
The table 4.20 shows the residual maturity of the rate sensitive assets
and rate sensitive liabilities of 1-14 days, 15-28 days, and 29 days -3
months, 3-6 months and 6 months – 1 year. It revealed that the time
buckets of 6 months-1 year is vulnerable paving way to negative GAP of
high volume.
134
Table-4.21: Residual Maturity pattern of assets and
liabilities for the year 2010-2011
Rs. in Lakhs
Maturity patterns Deposits Advances Investments Borrowings
Foreign currency
assets
Foreign currency liability
1 to 14 days
5900 11400 -- -- -- --
15 to 29 days
6200 11500 -- -- -- --
29 days to 3 months
8200 24300 -- -- -- --
3 to 6 months
20200 21100 -- -- -- --
6 months to 1 year
25100 20800 1197 600 -- --
1 to 3 years
28300 11400 2221 6000 -- --
3 to 5 years
15200 11100 15230 7500 -- --
Over 5 years
19588 7875 9480 20064 -- --
Source: Annual Report of KGB for the year 2010-11.
Table-4.22: Break up of assets and liabilities based on
residual maturity pattern for the year 2010-11
Items Volume (Rs.in lakhs)
Interest Rate Mix (%)
RSA 90297 11.00 49.40
FRA 57306 11.00 31.35
NEA 35163 -- 19.25
Total/ average 182766 7.33 100.00
RSL 66200 6.08 36.22
FRL 96652 6.08 52.88
NIBL 19914 -- 10.90
Total/ Average 182766 4.05 100.00 Source: Figures computed from Annual Report of KGB for 2010-11.
135
The table 4.22 shows the break up of assets and liabilities during the
year 2010-11. It shows that the RSA and RSL which are rate sensitive
assets and rate sensitive liabilities of balance sheet positions have been
classified according to the residual maturity. Here, the entire volume of rate
sensitive assets, rate sensitive liabilities, fixed rate assets, fixed rate
liabilities, non-earning assets and non-interest bearing liabilities have been
calculated and the total comes to Rs.182766 lakhs.
The interest rates for RSA, FRA, RSL and FRL have also been
computed. The average of interest rate for assets comes to 7.33 and the
average interest rate for liabilities comes around 4.00.
The portfolio mix computation suggests that the assets mix i.e., RSA
comes around 50% and for FRA comes around 31%, for NEA comes
around 19%. Similarly, the liability mix i.e., RSL comes around 36%, for
FRL is 53% and NIBL comes around 11%.
The following table shows that there is a positive Gap. This trend is
advantageous during the period of increasing interest rates.
Table-4.23: Summary of Performance Measures for 2010-11
Rs. in Lakhs
Change in interest rate
Performance Measure Initial Position 2% decrease in interest rate
2% increase in interest rate
GAP (RSA-RSL) 24097 24097 24097
Net interest income 6525.18 6043.24 7007.12
Net interest margin (%) 4.38 4.05 4.70
Net income 5385.61 4903.67 5867.55
Figures computed from Annual Report of KGB for the year 2010-11.
136
The performance measures such as net interest income (NII), net
interest margin (NIM) and net income (NI) has been computed. It can be
inferred that in the year 2010-11, the Gap is positive and it comes around
Rs.24097 lakhs. The net interest income is Rs.6525.18 lakhs, the net
interest margin (NIM) is 4.38 which is just below the standard norm fixed
by the World Bank (4.5%) and the net income comes to Rs.5385.61 lakhs.
The above data is shown with the help of figure 4.6.
Figure-4.6: Summary of Performance Measures for the year 2010-11
0
1000
2000
3000
4000
5000
6000
7000
8000
Rs.
in
Lakh
s
Net interest income Net income
Performance Measure
Initial Position 2% decrease in interest rate 2% increase in interest rate
When 2% interest rate decreased, it reduced NII to Rs.6043.24 lakhs,
NIM to 4.05%, and NI to Rs.4903.67 lakhs, whereas when 2% increase in
interest rate was applied, it increased NII to Rs.7007.12 lakhs, NIM to
4.70% and NI to Rs.5867.55 lakhs. The change in interest rate ultimately
has effect on NII, NIM and NI. Due to the positive Gap the bank is more
advantageous during the period of increasing interest rates.
137
Table-4.24: Period wise Residual Maturity of assets and
liabilities for the year 2010-11
Rs. in Lakhs
Items 1 to 14 days
15 to 28 days
29 days to 3
months
3 to 6 months
6 months
to 1 year
Advances 11400 11500 24300 21100 20800
Investments -- -- -- -- 1197
Foreign currency assets
-- -- -- -- --
Deposits 5900 6200 8200 20200 25100
Borrowings -- -- -- -- 600
Foreign currency liabilities
-- -- -- -- --
GAP 5500 5300 16100 900 -3703
Source: Annual Report of KGB for the year 2010-11
The above table shows the residual maturity of the rate sensitive
assets and rate sensitive liabilities of 1-14 days, 15-28 days, and 29 days – 3
months, 3 – 6 months and 6 months – 1 year. It revealed that the time
bucket of 6 months to 1 year is vulnerable paving way to negative GAP of
high volume, this is due to mismatch between assets and liabilities.
138
Table-4.25: Residual Maturity pattern of assets and
liabilities for the year 2011-12
Rs. in Lakhs
Maturity patterns
Deposits Advances Investments BorrowingsForeign
currency assets
Foreign currency liability
1 to 14 days
6500 12900 -- -- -- --
15 to 29 days
7600 12600 -- -- -- --
29 days to 3 months
8800 24700 -- -- -- --
3 to 6 months
23100 21400 -- -- -- --
6 months to 1 year
27800 22300 1495 17300 -- --
1 to 3 years
29500 15400 2544 675 -- --
3 to 5 years
16900 11600 16366 1250 -- --
Over 5 years
19919 8574 9788 2069
Source: Annual Report of KGB for the year 2011-12.
139
Table-4.26: Break up of assets and liabilities based on
residual maturity pattern for the year 2011-12
Items Volume (Rs.in lakhs)
Interest Rate Mix (%)
RSA 95395.00 10.65 52.38
FRA 64272.00 10.65 35.29
NEA 22464.00 -- 12.33
Total/ average 182131.00 7.10 100.00
RSL 91100.00 6.53 50.01
FRL 70313.00 6.53 38.61
NIBL 20718.00 -- 11.38
Total/ Average 182131.00 4.35 100.00
Source: Figures computed from Annual Report of KGB for 2011-12.
The above table shows the break up of assets and liabilities in the
year 2011-12. The table shows that the RSA and RSL which are rate
sensitive assets and rate sensitive liabilities of balance sheet positions have
been classified according to the residual maturity. Here, the entire volume
of rate sensitive assets, rate sensitive liabilities, fixed rate assets, fixed rate
liabilities, non-earning assets and non-interest bearing liabilities have been
calculated and the total of which comes Rs.182131 Lakhs.
The interest rates for RSA, FRA, RSL and FRL have also been
computed. The average of interest rate for assets comes around 7.10 and
the average of interest rate for liabilities comes around 4.35.
140
The portfolio mix computation suggests that the assets mix i.e., RSA
comes around 52 and for FRA it is around 35, for NEA around 13.
Similarly the liability mix i.e., RSL comes around 50, for FRL comes
around 39 and for NIBL comes around 11.
The following table shows that there is a positive Gap I.e.,
RSA>RSL. This trend is more advantageous during the period of
increasing interest rate.
Table-4.27: Summary of Performance Measures for 2011-12
Rs. in Lakhs
Change in interest rate
Performance Measure Initial
Position 2% decrease in interest
rate
2% increase in interest
rate
GAP (RSA-RSL) 4295 4295 4295
Net interest income 3382.25 3296.35 3468.15
Net interest margin (%) 2.14 2.09 2.20
Net income 2107.79 2021.89 2193.69
Figures computed from Annual Report of KGB for the year 2011-12.
The performance measures such as net interest income (NII), net
interest margin (NIM) and net income (NI) have been calculated. From the
above table it can be inferred that in the year 2011-12, the Gap is positive
and it comes to Rs.4295.00 lakhs. The net interest income is Rs.3382.25
lakhs, the net interest margin comes to 2.14% which is much lesser than the
standard ratio fixed by the World Bank and the net income comes to
Rs.2107.79 lakhs. The above data is shown with the help of figure 4.7.
141
Figure-4.7: Summary of Performance Measures for the year 2011-12
0
1000
2000
3000
4000
5000
6000
7000
8000R
s. in
Lak
hs
Net interest income Net income
Performance Measure
Initial Position 2% decrease in interest rate 2% increase in interest rate
When 2% interest rate decreased was applied, it decreased NII to
Rs.3296.35 lakhs, NIM to 2.09% and NI to Rs.2021.89 lakhs. However,
when 2% interest rate increased was applied, it increased NII to Rs.3468.15
lakhs, NIM to 2.20% and NI to Rs.2193.69 lakhs.
Changes of interest rate in bank will effect on NII, NIM and NI. In
case of positive GAP i.e., RSA>RSL, bank is more benefitted during the
period of increasing interest rate.
142
Table-4.28: Period wise Residual Maturity of assets and
liabilities for the year 2011-12
Rs. in Lakhs
Items 1 to 14 days
15 to 28 days
29 days to 3
months
3 to 6 months
6 months
to 1 year
Advances 12900 12600 24700 21400 22300
Investments -- -- -- -- 1495
Foreign currency assets
-- -- -- -- --
Deposits 6500 7600 8800 23100 27800
Borrowings -- -- -- -- 17300
Foreign currency liabilities
-- -- -- -- --
GAP 6400 5000 15900 -1700 -21305 Source: Annual Report of KGB for the year 2011-12.
The above table shows the residual maturity of the rate sensitive
assets and rate sensitive liabilities of 1-14 days, 15-28 days, and 29 days to
3 months, 3 – 6 months and 6 month – 1 year. It revealed that the time
bucket of 3 months to 6 months and 6 months to 1 year is vulnerable paving
way to negative GAP of high volume. It is needless to say that negative
gaps are due to mismatch in the maturity pattern of assets and liabilities.
It is evident from the above study that there are many techniques of
assessing interest rate risk which are in use but in the present study the
maturity gap analysis technique is used to assess the interest rate risk. The
bank is maintaining positive gap in almost all the years except during the
year 2005-06 wherein it was negative. It indicates that the bank is managing
effectively the composition of its assets and liabilities. The present decade
witnessed rising interest rates. The bank is taking full advantage of rising
interest rates by maintaining the positive gaps. It shows the efficiency of the
bank in managing the interest rate risk
143
144
REFERENCES:
1. Padhi A.K. “Programme on asset liability management” Bankers
Institute of Rural Development Lucknow , January 2010 p.38.
2. Bhattacharya K.M. “Risk Management in Indian Banks” Himalaya
Publishing House, Mumbai 2008.p.11.
3. Principles for the Management of Interest Rate Risk Basle
Committee on Banking Supervision, September 1997. Pp.6-7.
4. Timothy W. Kock and Scott Madonold “Managing Interest Rate
Risk” Thomson Asia Pte. Ltd., Singapur, 2003 pp.326-330.
5. Dhandapani Alagiri “Risk Management in Banks Current
Developments” ICFAI University Press Hyderabad, 2008 p.205.
6. Dr B. Charumathi “Asset Liability Management in Indian Banking
Industry- With Special Reference to Interest Rate Risk Management
in ICICI Bank” Proceedings of the World Congress on Engineering
Vol.11WCE London-UK, July 2008 pp.2-3.
7. Joshipura J.P. “measuring performance of banks using financial
ratio” The Indian Banker, Vol. lV No. 7, July 2009 pp.25-26.
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